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Definition: Junk bonds
Junk bonds are those that have a low credit rating at the time of investment. Generally, this rating is below ‘BB’. These bonds are high-yield, non-investment grade bonds that offer interest rates higher than the normal government securities that make it attractive for the investors.
They offer a higher interest rate, as the default risk for these bonds is pretty high and more than the general bonds issued in the market. Investors purchase junk bonds for purposes of speculation.
These bonds are generally issued by companies that do not have long track records and there is a high probability that the company will not be able to meet its debt obligations thus increasing its default risk.